A ten-minute walk from Ireland's main thoroughfare, O'Connell Street, takes you past monument after monument to the greed and profligacy of the Celtic Tiger years. Between the northern end of Dublin's busiest street and the 81,000-capacity stadium at Croke Park are swathes of waste ground where new private and public housing projects should have been built.

Behind the Gaelic sports stadium lies a square of boarded-up terraced houses earmarked for redevelopment during the boom times, which now stand empty because the state, and the property developers whose building programmes overheated the economy, are broke.

In a project called Croke Villas behind the stadium's Cusack stand, Dublin corporation, in alliance with the builders, had promised residents of run-down postwar flats new homes in an exciting public-private housing partnership. Now that the money has run out, some people still live in the old flats complex, while the promised houses remain empty shells.

As the spectre of a double-dip recession looms over the republic even areas close to the heart of the Irish capital are starting again to resemble the recession-ravaged 1980s.

The Irish government has to prepare the country's population for yet another austerity budget in December – its fourth in two years. Last week finance minister Brian Lenihan's budgetary plans were thrown into further chaos by more alarming economic data. Irish gross domestic product fell by 1.2% in the second quarter of this year, unlike the rest of the eurozone, where growth is averaging about 1%. As a result Ireland is more vulnerable to a further loss of investor confidence.

Prime minister Brian Cowen's Fianna Fáil/Green party coalition has tried to instil global faith in the Irish economy by slashing public spending. Lenihan had planned to take a further €3bn (£2.5bn) out of the economy – but the latest growth figures suggest those budget cuts may now be made even deeper.

The prognosis from Irish economy-watchers last week was grim. "This is a dismal situation and is now so grave that the Irish have no choice but to introduce even tougher austerity measures," said Chris Scicluna, an economist at Daiwa Capital Markets. "On every measure – the depth of the recession, the cost of the bailout, the collapse of the construction sector, and the higher cost of issuing debt – Ireland is top of the tree."

On the bright side, economists including Mike Smyth at the University of Ulster believe the republic's brutal cost-cutting programmes have been "exemplary" compared with the rest of the EU. Smyth, a member of an EU-led Brussels thinktank of European economists, has argued that Lenihan's cuts lead the way for other economies in trouble – principally Spain, Portugal and Greece.

Others, including those linked to the trade union movement, contend that the Dublin government's austerity programme has failed to win over the sceptics on the international bond markets and credit rating agencies.

Mike Tait, economic researcher for the Unite union in Ireland – pointing to a line of terraced cottages on Foster Terrace close to Croke Park that at the height of the boom were fetching up to €250,000 – said: "You certainly wouldn't get anywhere near that price now – or in the future."

Tait argued that the austerity programme over the past 18 months failed to impress international markets.

"Why, for example, would investors seek to put their money into a deflationary economy? We have taken something like 6% of Irish GDP out of the economy in cuts and increased taxes. That has shattered consumer confidence and spending, so why does the government think another round of savage cost-cutting, leading to a further reduction in consumption, is going to save us?"

He pointed out that a month after last year's budget, despite the cuts, Irish government bonds still cost more than all other nations in the EU apart from Greece. "The markets and the economy-watchers were simply not that impressed. So it is surely time to try another way."

The unions propose an Obama-style stimulus package to give the Irish economy a boost. "Out of 29 OECD countries Ireland is 26th in terms of having the best road, rail and water infrastructures. What's needed is an increase by the state in investing in the dire Irish infrastructure as part of a stimulus package, because deflation has not worked," Tait said.

One yardstick of the continued fall in Irish domestic demand is the republic's pub and restaurant trade, which has taken a hammering as customers have fewer euros to spend. The Drinks Industry Group Ireland has estimated that "in-house demand" – that is, people spending money in bars and cafes – has fallen by 14% so far this year.

Kieran Tobin, the group's president, said that 1,500 pubs had closed and 10,000 people had lost their jobs in the Irish hospitality business in this recession. "It's a mixed picture because in terms of exports, products such as Jameson Whiskey or Baileys Irish Cream are growing on the global market, particularly in America and Asia. This is bringing in tens of millions into the economy – but the real problem remains consumption at home. Last year the government's decision to reduce excise duty boosted the off-licensed trade and stopped the leakage of millions of euros to Northern Ireland, where drink was cheaper. But to be honest with you, in pubs, restaurants and cafes the trend is still not encouraging," Tobin said.

It is unlikely there will be an outbreak of Keynesianism in the December budget, with the finance minister expected to cut even deeper into public spending than previously projected. There is no guarantee, however, that this will restore confidence in the government's handling of the economic and financial crisis, for two main reasons.

First, the ever-increasing costs of bailing out Ireland's troubled banks, and in particular Anglo Irish Bank, which could cost the Irish taxpayer up to €30bn to keep afloat.

Second, political instability. Last week Brian Cowen just about survived calls to resign after allegations he was under the influence of alcohol during a live interview on Irish radio. Even if Cowen survives, the administration faces three or possibly four byelections after the budget, each of which it is likely to lose. Ireland could be facing a period of serious political turbulence in early 2011 and even a general election in the spring.

So whatever the outcome of the budget and the international markets' response to the latest economic rescue measures, a sense of foreboding permeates the atmosphere all around Dublin. One disgruntled small builder, angry at the behaviour of the banks and the government, has even nailed up a wooden painted hoarding close to a row of tall, gleaming glass buildings in the city's docklands, most of them still unoccupied. At the southern end of the Dublin Port Tunnel, the message from the builder is ominous: "Cruel is the knife and the scar runs deep."